What's driving Peoples Gas parent's 'new' pipe-replacement plan?

Peoples Gas' plans for a “fresh start” of its cost overrun-riddled gas-main replacement program is nothing of the kind, consumer advocates contend.

The utility, now owned by Milwaukee-based WEC Energy Group, presented state utility regulators earlier this week with a new plan for the massive, multiyear infrastructure effort. And it looked strikingly like what Peoples had in mind before late June, when WEC bought its parent, Integrys Energy Group, for $5.7 billion.

“Peoples' report is simply more of the same,” Illinois Attorney General Lisa Madigan said in an email. “Instead of a complete overhaul of the program, they've decided to forge ahead with little regard for the consumers who are on the hook for this massive cost overrun.”

A Sept. 30 report by Liberty Consulting, the independent auditor hired by the Illinois Commerce Commission to probe the management of the multibillion-dollar project known as the Accelerated Main Replacement Program, or AMRP, raised questions about what level of gas-main work should occur in the short term while the company gets a better handle on soaring costs.

'A FUNDAMENTAL REVISIT'

There is a need, Liberty wrote, “for a fundamental revisit of the AMRP's scope, cost and schedule. . . .The need for the AMRP to proceed under a realistic set of parameters . . . calls into question what level of AMRP work should continue over the next 12 to 24 months.”

The new management appeared to swat aside the auditor's concerns in a report of its own on Nov. 30. Management proposed performing exactly the same level of AMRP work that was occurring before. Peoples called for $250 million to $280 million of investment annually over the next three years in the program and projected the same completion rate that the utility had accomplished before under its discredited approach.

So, why the seemingly tone-deaf response to the commission's auditors?

The company said the work of replacing nearly 2,000 miles of decades-old gas mains is too important to slow down.

Perhaps another answer lies in the consistent promises WEC Energy Group has made to its investors about the pace of investment in Chicago since it originally agreed to buy Integrys in 2014. All along, the company has promised $250 million in capital spending in Chicago per year, enabling it to hike Peoples Gas rates and boost its earnings.

DOUBLING DOWN

On Nov. 10, WEC Energy execs appeared at the utility industry's biggest yearly investor event and doubled down on investing in Peoples despite the persistent questions about the program. Slides accompanying the presentation projected the $250 million in annual spending on the program beginning in 2016.

Nearly 30 percent of WEC Energy Group's $1.4 billion capital spending budget for 2016 is pegged for its Illinois gas utilities (principally Peoples) even though Illinois accounts for just 13 percent of the company's current rate base (Wisconsin makes up 70 percent).

“We'll be spending $250 million to $300 million of capital a year, replacing underground lines and moving many meters, thousands of meters from the inside of homes in Chicago to the outside of homes in Chicago,” WEC Energy Group CEO Gale Klappa told investors on Nov. 10. “It's a fascinating project.”

Added Chief Financial Officer James Patrick Keyes, after joking that WEC bought Integrys for its Green Bay, Wis., utility that provides power to the Packers: “One of the reasons we purchased Integrys . . . was there was a backlog of capital projects to choose from.”

'CLEAR AND COMPELLING NEED'

In an email, a Peoples Gas spokeswoman wrote, “The proposal to invest approximately $250 million a year over the next three years was driven by a clear and compelling need to maintain and improve the safety of the natural gas delivery network in Chicago. In our filing, we identified the most urgent work that needs to be accomplished and we believe we can bring greater efficiency and accountability to the work so that the cost will be approximately 15 percent lower in the near term than the trajectory of the previous management.”

Asked to point to where in Peoples' most recent report the utility shows it's prioritizing the most urgent work, the spokeswoman highlighted the section in which the utility plans next year to replace pipes in four Chicago neighborhoods: Beverly, South Shore, Portage Park and South Austin. But she acknowledged that the previous management of Peoples already had planned to tackle those neighborhoods in 2016.

For its part, the ICC will have to decide whether to allow Peoples to proceed full speed ahead over the concerns of the commission's auditor, Madigan and the Citizens Utility Board.

An ICC spokeswoman says the commission is pondering what next steps to take and will make a decision later this month.